Look before you leap

While the global credit crunch has made a significant dent in global M&A deals, the telecom sector in the Middle East, Africa and Asia appears to be heading in the opposite direction. According to industry insiders, the sector is likely to see significant deal activity in the next couple of years, with even a merger of two of the Middle East’s biggest operators a possibility.

While the global credit crunch has made a significant dent in global M&A deals, the telecom sector in the Middle East, Africa and Asia appears to be heading in the opposite direction.

According to industry insiders, the sector is likely to see significant deal activity in the next couple of years, with even a merger of two of the Middle East’s biggest operators a possibility.

And given that the sector may be bracing itself for renewed M&A activity, it is perhaps convenient that one of the mega-deals currently on the table also serves as a sobering reminder of the difficulties – many of them unexpected – that can plague potential deals.

Indeed, Reliance Communications bid for South Africa’s MTN shows just how deals can become mired in unforeseen complications. In this case, sibling rivalry is threatening to derail negotiations.

Reliance Communications, India’s second biggest mobile operator, entered talks with South Africa’s MTN last month, and the early signs looked positive. Reliance’s chairman, Anil Ambani, who owns 66% of the company, said he was keen to develop a partnership to “provide investors, customers and the people of both companies a unique and global platform for exponential growth.”

But Ambani had failed to factor in the likelihood of his elder brother and archrival Mukesh throwing a spanner in the works. Mukesh, who runs Reliance Industries, India’s largest private sector conglomerate, claims a right of first refusal over any sale of his brother’s shares in Reliance Communications – a claim that could derail the deal.

While most telecom operators looking to make acquisitions in Africa are unlikely to face stubborn opposition from the chairman’s brother, they are almost certain to face a minefield of legal technicalities, integration issues, and often a lack of transparency from the target.

Despite this, the message from M&A lawyers specialising in the telecom sector is clear. The potential opportunities in Africa are enormous, and the potential problems can be countered by conducting thorough due diligence.

Furthermore, according to Matthew Glynn, a lawyer specialising in the telecoms sector with DLA Piper, it could well be smaller, lesser known operators used to high risk environments who best placed to take advantage of opportunities in Africa. “I think we’ll see a few new folks move into the top-five in terms of pan-African operations and some of them you won’t even have heard of,” Glynn says.

But while a new breed of smaller operator may be prepared to take greater risks than their bigger counterparts, they should also learn from the mistakes of some of their bigger rivals, and ensure they look before they leap.